InterDigital: From Patents to Products

For the past 30 years, InterDigital Communications Corporation has built a solid business by carefully culling its patent portfolio and then licensing that technology to various manufacturing and technology firms. This strategy has been InterDigital's mainstay, but now the company is hoping to broaden its horizons and start building advanced products based on its intellectual property.

This tactic isn't new – InterDigital has been trying to move beyond its patent-protector status for a number of years but has had little success so far. Analysts are praising its new strategy because it would make the company less dependent upon its patent licensing activities, which can sometimes get tied up in litigation, making revenues hard to predict.

Bill Merritt, the firm's newly appointed president and CEO who replaced former CEO Howard Goldberg in May, believes he can take this strategy from concept to reality because of his success with other aspects of the company's business.

Merritt is no stranger to InterDigital. A 7-year member of the firm's executive team, Merritt most recently headed up InterDigital Technology Corporation, which handles the company's technology licensing, and served as InterDigital Technology's general patent counsel. While heading up InterDigital Technology, Merritt helped build the company's licensing revenue from $100,000 annually to its current level of $130 million to $140 million in annual revenue.

In his new role, Merritt insists that he doesn't plan to dramatically change the company's direction; he just wants to expand its potential. "Our strategy is going to be the same," he says. "InterDigital is rooted in developing advanced technologies. We are grounded in intellectual property and monetizing that through licensing. That will remain the mainstay of the company."

ARBITRATION SUCCESS InterDigital may be broadening its horizons with further technology development, but the company's patent business is celebrating a big victory. On July 1, the International Court of Arbitration determined that mobile phonemaker Nokia owes InterDigital for royalty obligations under its patent license agreement for 2G and 2.5G handsets and infrastructure sales. InterDigital estimates Nokia's royalty obligations from Jan. 1, 2002, through Dec. 31, 2003, will equal $112 million and its royalty obligations for products during 2003 will be in the range of $50 million to $55 million.

For 2005 and 2006, the company estimates that Nokia will be obligated to pay royalties in the range of $70 million to $90 million. However, the company admits that these are estimates and there is the potential for more contention from Nokia. InterDigital has filed a lawsuit in New York to enforce the arbitration ruling in case Nokia doesn't comply.

Still, the company believes the ruling adds credibility to its patent licensing program and Merritt says it will strengthen the company's position when it comes to potential acquisitions. "We are pursuing acquisition opportunities that are doable," Merritt said during a July 5 conference call with investors to discuss the arbitration. InterDigital also is awaiting a decision regarding royalty obligations that it believes it is owed by Samsung Electronics. That arbitration is expected to begin in October.

These arbitrations are a mainstay of the company's patent licensing business and the reason analysts are bullish on its plans to broaden its strategy. In a May research note, Piper Jaffrey research analyst Amit Kapur was cautious about InterDigital because of the then uncertain outcome of its arbitration with Nokia. However, Kapur also noted Merritt's efforts to drive synergies between InterDigital's product development and patent licensing.

BEYOND PATENTS InterDigital has started to develop products based upon its intellectual property. Last spring at the 3GSM World Congress in Cannes, France, the company demonstrated products that it has developed that are based on frequency division duplexing technology and HSDPA as well as adaptive interference management, or AIM. These are important technologies, but the company's challenge may be timing. "They are smart to position themselves behind certain technologies. If the technology succeeds, then they will take off," says Peter Jarich, principal wireless analyst with Current Analysis. "The key is timing. It's hard to predict how a market for a certain technology will develop."

Specifically, InterDigital has developed an HSDPA coprocessor for mobile terminals that is compliant with the most advanced 3G UMTS standard (3GPP Release 5). The HSDPA product is designed to integrate with existing FDD physical layer chips and supports peak data rates up to 14 Mbps. The company is offering the technology for incorporation into FDD Release 99/Release 4 chips or as a separate coprocessor chip.

In addition, InterDigital has developed AIM products for WLAN devices and access points, including AIM Antenna and AIM Performanceware, both of which have been developed to reduce interference, enhance network capacity and coverage, extend battery life, deliver higher average data rates and enable equipment manufacturers and semiconductor suppliers to differentiate their WLAN product offerings.

Merritt says the company is not ready to announce any deals for its new products, but notes that it has experienced a high level of interest from potential customers, particularly for its HSDPA solution. "I continue to believe that this is one of the leading solutions out there. It's designed to be scalable and to migrate up to HSUPA," Merritt says. "We are very happy with how the market has reacted to it."

Likewise, the company is bullish on its work with interference management. Merritt says there is a lot of interest in products that improve capacity and coverage in the WLAN space and he believes it will be an important area for the company. "There are a lot of problems that the cellular folks went through that the WLAN area is now experiencing. We believe we can leverage our skill in network management."

Leveraging skills will be essential to InterDigital's ability to reach its goal, morphing from a patent-packing powerhouse into a product-producing workhorse.